U.S. Asset-Backed Securities Issuance Is Headed For A Slowdown

Total asset-backed securities issuance (ABS) in the United States grew 140% in the period of 2008-2018. Yet, the first four months of 2019 show a decline in total ABS issuance. The Securities Industry and Financial Markets Association (SIFMA), the U.S. securities industry trade body, publishes data about mortgage and asset backed securities on a monthly basis and provides it to the public free of charge. The ABS categories are auto, collateralized debt obligations (CDOs), credit cards, equipment, student loans, and other. The CDO category includes all tranches of CDOs denominated in U.S. dollar, regardless of collateral source; CDOs include structured finance CDOs, trust preferred CDOs, collateralized bond obligations, collateralized loan obligations, and collateralized fund obligations. The ‘Other’ category is anything that does not fit into the other categories, including those with mixed asset categories (e.g., tax liens, trade receivables, boat loans, etc).

ABS issuance rose significantly between 2008-2018.

Data source: SIFMA

Not each ABS class has grown, and some categories have decreased in issuance. The ABS category that has grown the most since the crisis is equipment ABS, which rose by 865%, whereas student loan (- 33%) and credit card (-44%) ABS issuance declined. In the last few years, equipment ABS issuance has been a reliable source of financing for commercial equipment companies.

Equipment ABS issuance has exploded in a decade.

Data source: SIFMA

Since the crisis, CDOs’ peak issuance was in 2017 at $294 billion. In 2018, issuance decreased by 5%. Of the $516 billion ABS issuance in 2018, CDOs represented almost 55% of all issuances, a significant increase from 2008 when CDOs were 38% of all issuances. Presently, CLOs represent 80% of the $808 billion CDOs outstanding. As I have written in several articles in the last six months, the concern about CLOs is that most of the loans in them are covenant-lite. Banks own about 50% of CLOs, and they tend to buy the best rated ones. The other 50% are held by non-banks such as hedge funds, insurance companies, and asset managers.

CDOs are 55% of all ABS issued in 2018.

Data source: SIFMA

For the first four months of 2019, total ABS issuance decreased by 42% in comparison to the same period in 2018. The most significant declines were in the CDO/CLO (-79%) and student loan (-21%) ABS categories. Auto loan and equipment ABS issuance rose almost 10% in the same period. Concerns about the direction of interest rates and December’s volatility weighed on market participants at the beginning of the year. Now that the Federal Reserve has paused interest rate hikes, it is possible that market participants might jump into the securitization issuance market with more vigor, but presently, I am not seeing a big pipeline off ABS issuance.